EYE ON THE STATES

The New 'Old' Reality of State and Local Government

Thomas Davies

There has been much speculation ? often accompanied by breathless announcements ? about what the war on terrorism means for state and local government. Visions of new spending for advanced security systems, enhanced emergency response capabilities and integrated databases are popping up everywhere.

These proposals tend to rest on the premise that the states are ready to go on an IT spending spree. Some of these changes may come about in due time, but don't expect anything dramatic to happen in the next six to nine months.

Companies should not rush into the market expecting state and local governments to change direction on a dime. The fundamental drivers of IT spending are still in place, so a better move would be to re-examine them and see how they're shaping future IT spending.

IT spending in state and local government is driven by three forces: government policy, economics and demographics. Their interplay between 1995 and 2000 is what produced the golden era of IT in state and local government. For example, in 1996, Congress passed landmark legislation popularly referred to as welfare reform. As a result, for the first time the states began receiving federal funding in the form of block grants.

With a couple exceptions, the states were allowed to use this funding as they saw fit, including spending on IT. Also to note, the size of a block grant was tied to size of the welfare caseload at that time.

This deal became even sweeter for the states as the longest peacetime economic expansion in the United States continued. The welfare caseload dropped with the growing economy, as did other demands for costly state services. For example, there was a precipitous slowdown in the growth of state prison populations and of the number of people covered under Medicaid. The traditional pressures to divert scarce funding away from IT to recipient benefits, operations and maintenance for corrections, health care and social services programs simply evaporated.

Accompanying this was a period of significant organic growth in state and local tax collections. Sources of funding for state IT programs were hitting on all cylinders. The states experienced unusually high growth in tax collections from all primary sources of taxes: sales, capital gains, income and property.

Tack on the additional federal grant funds ? resulting in good part from the growing federal budget surplus ? and you're talking about spectacular increases in state and local revenue. In some states, government revenues grew by more than 40 percent during this time period.

It was easy to confuse cause and effect during this period. At times it appeared as if new technologies were driving IT spending instead of benefiting from a confluence of favorable economic, demographic and policy forces.

The reality is that in state and local government policy, demographics and economics trumps technology.

This market is now in the midst of a major transition to a new IT era. The same demographic, economic and policy forces that led to unprecedented levels of IT spending are now conspiring against it. While IT expenditures will keep growing, in some case at very healthy rates, double-digit annual growth can no longer be taken for granted.

The generation of state and local leaders ? elected, appointed and career executives ? that came of age after 1995 has been sensitized to the importance of IT in government. Most believe it is essential to achieving critical public policy objectives and meeting citizen needs. But they need help re-thinking the strategic contribution of IT to public policy goals for a new era.

There is no road map for where the states are about to go. Even familiar concepts such as e-government and service-to-citizens via the Internet will need to be rethought. Viewing health care and criminal justice records through the prism of national security is truly unprecedented. The recent trend to consolidate and centralize IT assets will need to be re-examined with security in mind.

Several states, such as Florida, are searching for a new chief information officer. The type of person they need as a CIO to chart the future is now quite different. State and local governments will need CIOs who excel in aligning the new priorities and strategies of government with IT. CIOs will need to work collaboratively at the highest levels to develop and implement new IT policies concerning security, privacy and information sharing.

And their focus will need to be on the business processes of government more than ever before. The advantages of having a CIO whose primary role is to promote economic development, serve as a cheerleader for e-government or be an external ambassador are numbered.

Helping state and local government step up to these challenges is where the best-in-class IT companies will earn their stripes in the months ahead. If they do, buyers will reciprocate and demonstrate their appreciation with loyalty and opportunity to win future business. For these companies, state and local government could become the safe haven everyone hopes it will be.

Thomas Davies is senior vice president at Current Analysis Inc. in Sterling, Va. His e-mail address is tdavies@currentanalysis.com.

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